Robust Benchmark Design

56 Pages Posted: 6 Oct 2014 Last revised: 15 Feb 2023

See all articles by Darrell Duffie

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Canadian Derivatives Institute

Piotr Dworczak

Northwestern University - Department of Economics

Date Written: October 2014

Abstract

Recent scandals over the manipulation of LIBOR, foreign exchange benchmarks, and other financial benchmarks have spurred policy discussions over their appropriate design. We characterize the optimal fixing of a benchmark as an estimator of a market value or reference rate. The fixing data are the reports or transactions of agents whose profits depend on the fixing, and who may therefore have incentives to manipulate it. If the benchmark administrator cannot detect or deter the strategic splitting of trades, we show that the best linear unbiased fixing is the commonly used volume-weighted average price (VWAP).

Suggested Citation

Duffie, James Darrell and Dworczak, Piotr, Robust Benchmark Design (October 2014). NBER Working Paper No. w20540, Available at SSRN: https://ssrn.com/abstract=2505846

James Darrell Duffie (Contact Author)

Stanford University - Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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Canadian Derivatives Institute ( email )

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Piotr Dworczak

Northwestern University - Department of Economics ( email )

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Evanston, IL 60208
United States

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